Government has notified a new tax structure for tobacco products and pan masala, introducing:
- Additional Central Excise Duty on tobacco products, and
- Health & National Security Cess (HSNSC) on pan masala and related products
This new structure will replace the existing GST Compensation Cess on sin goods from 1 February 2026.
Key Highlights
- The move introduces separate levies over and above GST rates.
- GST rates remain:
- 40% GST– pan masala, cigarettes, tobacco & allied products
- 18% GST– bidis
- New levies will operate independently of GST, replacing compensation cess.
- Parliament earlier approved two enabling legislations in December 2025.
- Finance Ministry has also notified:
- Chewing Tobacco, Jarda Scented Tobacco & Gutkha Packing Machines (Capacity Determination & Duty Collection) Rules, 2026
- These rules define production-capacity based duty assessment for chewing-tobacco manufacturers.
Why the Change? Background & Policy Context
- Earlier, GST Compensation Cess on sin goods funded state-revenue compensation post-GST rollout.
- This arrangement was temporary and linked to COVID-19-related fiscal liabilities.
- With compensation cess being phased out, the government has:
- Introduced HSNSC for pan masala
- Introduced additional excise duty on tobacco
- Ensured a stable revenue stream without altering GST constitutional framework.
These measures complement GST, rather than replacing or altering it.
What is Health & National Security Cess (HSNSC)?
- A new capacity-based cess imposed on:
- Pan masala & similar product manufacturing units
- Levied on entities owning or operating manufacturing machines.
- Intended to generate revenue for:
- Public health system strengthening
- National security infrastructure
- Receives statutory backing through legislation passed in December 2025.
Impact on Different Product Categories
Pan Masala
- Will attract HSNSC based on manufacturing capacity.
- Separate from GST — aimed at targeted fiscal deterrence.
Tobacco Products
- Cigarettes, cigars, chewing tobacco etc. will:
- Continue under 40% GST
- Attract additional central excise duty
- Compensation cess discontinued.
GST Structure (Effective 1 February 2026)
- 40% GST → most tobacco & pan masala products
- 18% GST → bidis
- Designed to:
- Discourage consumption
- Align taxation with public-health objectives
Economic & Market Implications
- Announcement triggered stock-market corrections in tobacco segment:
- Godfrey Phillips — declined over 15% during initial trade
- ITC Ltd. & other tobacco stocks — fell amid tax-burden concerns
- Investor sentiment reflects expectations of:
- Possible reduction in consumption
- Margin compression in sin-goods sector
- Short-term volatility driven by:
- Shift from compensation cess to new excise + cess regime
What Qualifies as “Sin Goods” Taxed at Higher Rates?
Products considered socially or health-harmful, including:
- Tobacco & allied products
- Pan masala, gutkha, chewing tobacco
- Aerated / sugary / caffeinated beverages
- Luxury & high-engine-capacity vehicles
- Yachts, private aircraft, racing cars
- Betting, casinos, online gaming & lotteries
High taxation is intended to discourage harmful consumption and fund welfare spending.
Consumer-Side Cost Implications (Broader GST Context)
- Many daily-use items placed in lower GST slabs (5% / 18%), reducing prices.
- Essential foods like milk, paneer, breads → Zero-GST category.
- However, tobacco & related products will transition to the new excise-plus-cess regime from notified dates.
Alcohol is not under GST — it is taxed separately by State Governments.
Why Alcohol is Not Included?
- Alcohol falls outside GST framework.
- Taxation handled by States, with very high duty incidence.
- Taxes account for 67–80% of retail price (ISWAI estimates).